There are almost 20 million rental properties in the United States alone. Most of these would have undergone some kind of rental valuation to determine how much to charge on rent for each of them. So, what is rental valuation, and how do you calculate it?
Below we have laid out what this term is and how you can work it out for yourself. There are many ways to do this, so we have included four of the methods to calculate rental income in four simple steps.
1. Cost Approach
This approach is useful if you are unable to find any other similar property that someone has sold or rented. You can base your rental valuation on the cost to rebuild the whole home.
In short, the calculation is as such:
Property value = Cost - Depreciation + Value of land
These figures are often easier to find than trying to calculate property value via other methods.
You can then determine the rental value by working out how fast you wish to pay off the property's value. If, for example, you wish to pay it off in exactly 10 years, you can divide the property value by 120. This will allow you to find the rent that you should take from the people staying there.
2. Income Approach
The income approach asks that you compare the "Net operating income" (NOI) of a rented location with the value of the property itself.
This is discovered by following this calculation:
Value = NOI / Property Value
This returns the percentage of return you will make on that property. You can then adjust this income based on your needs.
3. Gross Rent Multiplier
This allows you to find a fair market value of a location. The calculation is as follows:
Multiplier = Property Value / Annual Income from Property
This, like with the cost approach, gives you an amount of time until the property is paid off.
4. Rental Comparison
One of the easiest ways is not so much a calculation at all so much as some good research. Instead of looking at how much you paid for the property or how much you want to earn over a period, you can instead look at local properties.
Find a location that is similar to your rented location and compare the two of them. You will find that they are likely to have a good idea of how much such a single property is worth and have priced their rent as such. If you are still unsure, find more properties and look for an average so that you are not only relying on a single person.
More on Rental Valuation
With the above instructions, you should now be able to calculate the rental valuation based on your property value. If you still have questions and want to know more, though, you should ensure that you have someone on-hand to ask.
We provide property management advice and services to those in need. So, before you confuse yourself with the myriad of sites out there offering different advice, get in contact with us. Our experts are only a call away, so pick up the phone today.